What Could Another Rate Rise Do To The Australian Housing Market?!

**Sammy Gordon** (0:05)
G'day, listeners, and welcome to another APS News Bulletin, keeping you up to date and well-informed on everything happening in the Australian property market in real time. Guys, story number one, what could another rate rise do to the Australian housing market? Article by Eliza Owens, head of research over at CoreLogic, why are housing values increasing despite higher interest rates? There are a few explanations for why housing values have continued to rise even as cost of debt has risen and borrowing capacity has eroded. Part of the explanation comes from low supply relative to demand. Tight labour market conditions and an accumulation of savings through the pandemic have broadly underpinned mortgage serviceability, mitigating a need to sell as rates have increased. The construction sector remains squeezed and unable to deliver a large backlog of dwellings, and strong population growth has increased demand for housing, both for purchase and for rent. In the June quarter, there were around 127,000 homes purchased, but only about 125,000 new listings added to the market for sale. As long as there are more people willing to purchase a home than sell, prices should theoretically continue to rise. The composition of buyers may also be propping up purchases, with higher deposit sizes indicating the current buyer profile may be less dependent, or debt dependent that is, than when interest rates were at record lows. Other demand side factors influencing housing purchases could be the predominance of variable rate mortgages in Australia. Buyers may be pricing in a future reduction in the cash rate to their purchasing decisions, with the expectation that they are buying in or around the peak of the rate cycle and that their mortgage rates will trend lower over time. From this perspective, a further rate increase could certainly slow demand and signal to the market that interest rates are not yet at a peak or at the very least are likely to take longer to reduce. She also writes, another rate rise would slow housing demand and some cracks are already showing. Buying demand seems generally skewed towards cheaper markets, with Perth now being one of the primary markets driving growth in capital cities. In the month of June, it is estimated that Perth accounted for 32.5% of the 0.7% uplift in CoreLogic's Capital City Home Value Index, which obviously is only over a month, so it's a very small percentage. Adelaide has also contributed more to the headlines growth figure through June, up 14.2%, up from 4.1% a year ago. The RBA have expressed an extremely low tolerance for any further uplift in inflation. That's really key here, guys. It's extremely low tolerance for any further uplift in inflation. So if we see that continued uplift or saying subliminally high, any sort of movement, that's where we could be in some issues. The Reserve Bank's own deputy governor has been noting that it would be a bad mistake to base increases based on one result or one decision, highlighting that the quarterly inflation figures, the labor market report and retail sales data could also feed into the rate decision. So multiple things at play here as well. Other economists have pointed to the limitations of the monthly CPI measure, which does not always indicate the direction of the quarterly result. Westpac's economics team have predicted that the increase in the headline result to 4%, in part, due to base effects despite ANZ and NAB now revising the timing of the first rate cut to 2025 None of the four major banks are anticipating another rate rise just yet. However, if rates do not increase further, housing purchases are expected to slow as economic conditions become weaker and affordability constraints play out. Labor force conditions are clearly starting to unwind as job vacancies drop, employment growth slows and the unemployment rate rises lift, which will limit new demand and possibly weaken mortgage serviceability if mortgage holders become unemployed or work less hours. Now guys, in summary to this, whilst it is unlikely another rate rise could happen, it isn't fully out of the question. Inflation is staying stubbornly high and this is a huge indicator of the RBA and the government wanting to get it back under control and get it under control ASAP. Whereas said in there that the RBA has an extremely low tolerance for any lift in the inflationary numbers right now, it is more likely that inflation does come down over the next 6 to 12 months and rates potentially will come down with them at the same time. But really this is going to be closely linked with inflation, what happens on that front. And it doesn't fully rule out a rate rise if that does stay high or potentially does push up any higher. The lower end capitals as they've kind of jumped in there as well, the lower end capitals are driving house price growth to sustained affordability, although this needs to be carefully monitored as some cities are nearing affordability caps. As Big Timmy Lawless and I went through last week guys, that's a really important thing to keep an eye on as to where that is sitting in different cities, how that's looking from that perspective and then keeping a really close eye both on the inflation numbers and all the other indicators we ran through last week as well. I hope that gives you a bit of an idea as to what can happen, but realistically, lower end capitals, cheaper, more affordable markets compared to incomes in the area. They obviously still got some good fire in the belly, still pushing forward, still got propensity to continue to move forward.